Bernanke Seen Buying $1.14 Trillion in Assets in 2014

Ben S. Bernanke, chairman of the U.S. Federal Reserve, is seen in this Nov. 20, 2012 photo. Photographer: Scott Eells/Bloomberg

Jan. 29 (Bloomberg) -- Federal Reserve Chairman Ben S.
Bernanke’s latest round of bond buying will reach $1.14 trillion
before he ends the program in the first quarter of 2014,
according to median estimates in a Bloomberg survey of
economists.

Bernanke will push on with purchases of $40 billion a month
of mortgage bonds and $45 billion a month of Treasuries,
according to the survey of 44 economists, even as some Fed
officials warn his unprecedented balance-sheet expansion will
impair efforts to tighten policy when necessary.

“To get to the point where Bernanke would be comfortable
letting up, you have to have a good solid string of economic
reports that you’re just not going to get” this year, said Eric
Green, global head of rates and FX research at TD Securities
Inc. in New York and a former New York Fed economist.

The Federal Open Market Committee will renew its commitment
to asset buying during a two-day meeting that began today, after
determining the benefits from the program exceed any risk of
inflation or financial instability, according to economists
surveyed Jan. 24-25. Bernanke has said the policy will continue
until there are “substantial” gains in employment.

Fed officials have a brighter outlook for the economy than
many private economists. FOMC participants forecast growth this
year ranging from 2.3 percent to 3 percent, while economists in
a separate Bloomberg survey have a median estimate of 2 percent.

“The economy is not going to be able to generate growth
above 2 percent” as it faces headwinds from federal tax
increases and a weak global expansion, Green said.

Job Creation

Fed asset purchases will probably do little to help reduce
7.8 percent unemployment, economists said, with 57 percent of
them predicting the program won’t help boost the number of jobs
created this year.

Economists who expect gains from so-called quantitative
easing say it will account for an increase of 250,000 jobs
during 2013. Last year, the economy added 1.8 million jobs.

Employers probably hired 160,000 workers in January, after
a 155,000 increase in December, based on Bloomberg News survey
of economists before the Labor Department reports the figures on
Feb. 1.

In the first round of purchases, begun in 2008, the Fed
bought $1.4 trillion of housing debt and $300 billion of
Treasuries. In the second round, beginning in November 2010, the
Fed bought $600 billion of Treasuries.

Mortgage Bonds

In the current round, the Fed’s total purchases will be
split between $600 billion of mortgage-backed securities and
$540 billion of Treasuries, according to the median estimates of
economists in the survey.

Asked what would prompt the Fed to halt its bond buying, 63
percent of economists said the central bank will act in response
to substantial improvement in the labor market.

Only 13 percent said the Fed will end its purchases because
of accelerating inflation or a rise in inflation expectations.

Inflation for the 12 months ending in November was 1.4
percent, according to the Fed’s preferred gauge. That’s below
the central bank’s longer-run target of 2 percent. Investors
expect inflation of 2.24 percent over the next five years,
compared with 2.1 percent when the FOMC met Dec. 11-12, as
measured by the spread between Treasury Inflation Protected
Securities and nominal bonds.

Participants Differed

At the FOMC’s meeting last month, participants differed
over how long the bond purchases should last. Fed officials who
provided estimates were “approximately evenly divided” between
those who said it would be appropriate to end the purchases
around mid-2013 and those who said they should continue beyond
that date, according to minutes of the gathering.

A number of policy makers are concerned the size of the
Fed’s holdings “could complicate the committee’s efforts to
eventually withdraw monetary policy accommodation,” according
to the minutes.

The percentage of economists who consider monetary policy
“somewhat too easy” rose to 40 percent compared with 27
percent in a survey prior to the FOMC’s Dec. 11-12 meeting.

“The most interest-sensitive sectors have been responding
to the monetary stimulus from the Fed, and this stimulus has
provided a major source of strength for the economy last year,”
Rosengren said in a Jan. 15 speech in Providence, Rhode Island.
“And it is likely to be a source of support in 2013.”

Vehicle Sales

In December, light vehicles sold at an annualized pace of
15.3 million, down slightly from November’s pace of 15.46
million, which was the highest since 2008. Builders broke ground
on new homes at an annual pace of 954,000 last month, also the
highest since 2008.

“Housing data continue to corroborate that something real
is going on here, that housing has turned the corner,” said
Josh Feinman, the New York-based global chief economist for DB
Advisors, the Deutsche Bank AG asset management unit that
oversees about $228 billion, and a former Fed economist.
“That’s been a huge headwind obviously holding us back.”

The S&P/Case-Shiller index of home prices in 20 U.S. cities
increased 5.5 percent in the 12 months to November, the biggest
year-over-year gain since August 2006, according to data
released today.

An improving economic outlook and rising corporate earnings
have helped drive stock indexes to the highest levels in more
than five years.

Treasury Yields

The Standard & Poor’s 500 Index climbed 0.5 percent to
1,507.84 at the close of trading in New York. The yield on the
10-year Treasury note rose 0.04 percentage point to 2 percent,
matching the highest level since April.

St. Louis Fed President James Bullard and Kansas City’s
Esther George are among regional bank presidents voicing concern
about the risks from bond buying, which this month pushed the
balance sheet above $3 trillion for the first time.

Bullard told reporters in Madison, Wisconsin, on Jan. 10
that the Fed’s stance is “a very aggressive policy, and it is
making me a little bit nervous that we’re over-committing to
easy policy.”

George said in a Jan. 10 speech in Kansas City, Missouri,
that “a prolonged period of zero interest rates may
substantially increase the risks of future financial
imbalances.”

George, Bullard and Rosengren, along with Chicago Fed
President Charles Evans, assume voting seats on the committee
this year in an annual rotation among the district bank
presidents.